Enbridge (NYSE: ENB) and Kinder Morgan (NYSE: KMI) are two of North America's largest pipeline companies. Canada's Enbridge is the continent's dominant oil transporter as it ships 25% of all the oil produced in North America via the world's longest crude pipeline system. Kinder Morgan, meanwhile, leads the way in natural gas, shipping 40% of the gas consumed in the U.S.
Those large-scale operations provide these companies with boatloads of cash flow that they use to pay well-above-average dividends, as well as invest in expansion projects. While that combination of income and growth both make appealing options for investors, most probably want to own only one of these stocks in their portfolios. Here's a look at how these pipeline companies compare, which leads one to stand out as the better buy right now.
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Drilling down into their financial profiles
Kinder Morgan and Enbridge have worked hard over the past few years to shore up their balance sheets to put themselves in better positions to navigate through the energy market's challenges. As a result, both now boast strong financial profiles:
Percentage of cash flow fee-based or regulated
Dividend Payout Ratio
66% of cash flow
46% of cash flow
As that table shows, both companies have similar credit profiles, though Enbridge has a slightly better credit rating. Meanwhile, the Canadian oil pipeline giant gets a slightly greater percentage of its cash flow from stable sources like long-term, fee-based contracts. However, Kinder Morgan scores points for having a much lower dividend-payout ratio, which is the main reason its yield is less than Enbridge's.
Comparing their growth prospects
Enbridge currently has 16 billion Canadian dollars ($12 billion) of growth projects under construction. These expansions include new oil and gas pipelines on both sides of the border, a large wind farm offshore Germany, and investments to expand its natural gas distribution utilities.
The bulk of these projects should start service over the next 18 months, which leads Enbridge to believe it will generate $4.45 Canadian dollars per share ($3.33 per share) in cash flow this year and CA$5 per share ($3.74 per share) in 2020. This outlook implies that its earnings will increase by about 13% over the next two years. That's enough fuel to support Enbridge's plan to boost its dividend by another 10% in 2020. The Canadian pipeline giant anticipates that it can grow its cash flow per share at a 5% to 7% annual rate after next year by investing an average of CA$5 billion to CA$6 billion ($3.7 billion-$4.5 billion) per year on growth projects.
Kinder Morgan, meanwhile, expects its cash flow per share to increase by about 7% this year, to $2.20 per share, fueled in part by the $6.1 billion of growth projects it has under construction. The company should be able to grow cash flow by a similar rate in 2020 since most of its expansions won't enter service until the second half of this year and into late 2020. That earnings growth helps support Kinder Morgan's plan to boost its dividend by 25% next year. In addition, the company anticipates that it can secure between $2 billion and $3 billion of new expansion projects per year, which at the low end would fuel 4% annual earnings growth.
A quick look at their valuations
Shares of Kinder Morgan currently sell for less than $21 apiece. With the company on track to generate $2.20 per share of cash flow this year, it implies that Kinder Morgan trades at roughly 9.5 times cash flow. For comparison's sake, Enbridge's stock sells for less than $35 per share while it's on track to generate $3.33 per share in cash flow this year.
Those numbers imply that Enbridge sells for around 10.5 times cash flow. That suggests Kinder Morgan trades at a discount to its Canadian rival.
Verdict: Kinder Morgan is the better buy on valuation
Kinder Morgan and Enbridge both have strong financial profiles and solid growth prospects. However, despite those similarities, Kinder Morgan trades at a meaningfully cheaper valuation compared to Enbridge.
Because of that, the company could produce higher total returns for investors over the next few years. That factor makes its stock stand out as the better one to buy between these two right now.
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Matthew DiLallo owns shares of Enbridge and Kinder Morgan. The Motley Fool owns shares of and recommends Enbridge and Kinder Morgan. The Motley Fool has a disclosure policy.
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